BBRY Up 4%: Lenovo Speculation, Sale Talk Trumps Estimate Cuts

By Tiernan Ray

Shares of BlackBerry (BBRY) are up 40 cents, or 4%, at $10.61, following yesterday’s 1% rise despite some negative remarks from the Street in recent days and speculation yesterday that Microsoft‘s (MSFT) acquisition of Nokia‘s (NOK) handset business will make life harder for BlackBerry in the smartphone world. Last night, bulls received some vaguely encouraging words in the form of a Bloomberg article that stated Microsoft is “keeping an eye on BlackBerry.” This morning, there was a raft of mixed news. From the special situations desk at ISI Group this morning came a brief item suggesting a take-out by Lenovo Group (0992HK), which has been speculated about for some time now, could still happen.

Prem Watsa has stepped down from the board and made recent public comments recommitting his 9.89% stake ( Fairfax Financial Holdings) to a future “going private” proposal if one should materialize. “We view the R/R of a long position as favorable and would recommend purchase of shares at the current price of $10.40 with a +40% upside target.”While we think a deal would make more sense for a strategic buyer ( Lenovo, Microsoft or HTC) a financial sponsor could achieve a favorable IRR given the cash flow anticipated from the robust legacy base of enterprise and consumer subs.

But other notes in the last 24 hours were not as upbeat. National Bank Financial‘s Kris Thompson yesterday reiterated an Underperform rating, and an $8 price target, writing that he thinks shipments of the newer BB10-based smartphones — the Z10, Q10, and Q5 — in the fiscal Q2 ended in August totaled perhaps 3 million units, down from his original estimate for 5 million units.

We have not heard much buzz around large Q10 deployments in Q2. BlackBerry’s publicly announced strategic review may be based on poor BB10 uptake. Management always said that the BB10 platform needed to be launched before a sale of the company was contemplated. We expect 3.8 mln BB7 shipments vs 4.1 mln last quarter. BlackBerry continues to invest in the old BB7 platform (e.g., new 9720 will be available in Asia, EMEA and Latin America in September). The idea is that these subscribers may in the future upgrade to BB10 products. When Nokia announced in February 2011 that it would adopt Microsoft Windows Phone, Symbian sales held in for a few quarters but then dropped precipitously. BB7 shipments may fall faster than expected.

Thompson doesn’t say how he comes by his data on BlackBerry’s sales trends. Thompson cut his estimate for the fiscal year ending next February to a total of 26.7 million handsets sold, at an average price of $150, producing revenue of $11.899 billion and a net loss per share of $1.78, on a non-GAAP basis. That is down from his prior estimate for 28.5 million units, $14.49 billion in revenue, and a 59-cent net loss. He thinks the fact the company has publicly talked about a “strategic review” of its options is a problem:

BlackBerry is in the headlines most days given the company’s rise and demise in the important smartphone market. Our view is that enterprises will further delay implementations and even die-hard consumers will catch wind that BlackBerry is for sale and not commit to the platform. The public for sale sign may be what torpedoes management’s valiant efforts to resuscitate a dying brand.

Another negative piece came across the transom this morning from Paul Peterson with boutique research firm BlueFin Research Partners. Peterson asserts there has been substantial cuts to production of the BB10 devices, and he expects a write-down of inventoryis in BlackBerry’s future:

If there was any hope that Blackberry sales were going to take hold with the Q10 and Q5 launches after the failed Z10 intro, that optimism now appears to have faded. The BBRY component supply chain has experienced massive cuts in the last few weeks, with some suppliers seeing multiple rounds of reductions according to our checks. This is the third round of forecast reductions in the last four months, and a clear signal that the Q series is not going to salvage the BB10 family in our view. We believe current fiscal year forecasts are less than half of management’s initial expectations. In fact, our checks indicate that some suppliers are seeing close to zero demand from BBRY in the next several months due to bulging component and finished goods inventories. In our March 13th BBRY Supply Chain Update, we highlighted a surging supply chain prior to the Z10 launch that was indicative of a management team that was ‘all in’ for the BB10 launches, while noting their less than stellar track record: “It goes without saying that BBRY has fumbled more than a few forecasts in the recent past. Time will tell whether management is on target (or not) this time around.” Clearly management was very far from the target this time around. In the company’s last fiscal quarter, BBRY inventories grew nearly 50% to $887M as Z10 sales disappointed, while the company supported the Q10 and prepared for the upcoming Q5 launch. We think inventories have ballooned even further this quarter, with Q Series demand disappointing as well. Our checks indicate that BBRY has amassed significant component and finished goods internal inventories, while many carriers and retailers are not restocking. The executive in charge of the supply chain operations was dismissed recently, evidently the scapegoat for the company’s inventory woes. As Yogi Berra infamously once said, “this looks like Déjà vu all over again.” Last year, the Bold 9900 failed to live up to BBRY’s expectations and the company took a huge inventory write off on Blackberry handset and Playbook inventory. This year it’s likely to happen again with the BB10 models. The fate of BBRY hardware sales depended on the market acceptance of the Q Series to leverage their existing QWERTY base, and the lack of meaningful traction likely means that this story doesn’t end well for BBRY as a standalone hardware provider.

Peterson doesn’t say where he comes by the information about BlackBerry’s supply chain.

Update: The Wall Street Journal‘s David Benoit and Will Connorsthis afternoon report that BlackBerry “is aiming to run a fast auction process that could be wrapped up by November, according to people familiar with the Matter.”

Shares of BlackBerry rose another 19 cents, almost 2%, to $10.94 in late trading.

Add a Comment

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comment

There are 16 comments

SEPTEMBER 4, 2013 3:43 P.M.

BB Tracker wrote:

With all much of that predictions coming our from so call researchers and analyst, I can just say that If you all could have bought one piece of BB new phone; sales could have passed you own predicted figures.

There is so much of negative already written for BB since last 14 months and I am desperately waiting to see when will this company just close out but fortunately BBRY manage to remain debt free and add cash every quarter. I am so confused is it just analyst missing their predictions or BBRY missing misfortune.... ?

Growup and look from cross direction.

SEPTEMBER 4, 2013 4:06 P.M.

Stephen wrote:

BB Tracker...when a company keeps adding cash (without borrowing it) it means they are profitable. But under the crazy GAAP rules they are only now writing off expenses for old technology they actually spent money years ago.

SEPTEMBER 4, 2013 4:11 P.M.

Dan wrote:

Dear Barron's Management,

In light of Mr. Tiernan Ray's reports which are mostly cited or copied from other human beings, aka analysts, we think it is better off for your readers and your interests that his post should be replaced by someone who holds a high school diploma.

In doing so, not only the Barron's can save some cost and retain reputation, but it can also make investors more of investors not dummies in rice patches.

Thanks you sincerely,

a fan of Barron's and an investor of BBRY

SEPTEMBER 4, 2013 4:11 P.M.

Dan wrote:

Dear Barron Management,

In light of Mr. Tiernan Ray's reports which are mostly cited or copied from other human beings, aka analysts, we think it is better off for your readers and your interests that his post should be replaced by someone who holds a high school diploma.

In doing so, not only the Barron's can save some cost and retain reputation, but it can also make investors more of investors not dummies in rice patches.

Thanks you sincerely,

a fan of Barron's and an investor of BBRY

SEPTEMBER 4, 2013 4:13 P.M.

Benji wrote:

If you look at the Playbook tablet as R&D for the BB10; they actually were partially able to self-fund BB10 development by selling the Playbook. Pretty smart in that regard. Another reason cash grew instead of shrunk. The analysts were predicting the cash would run out some time in 2011.

SEPTEMBER 4, 2013 4:28 P.M.

BB Fan wrote:

Unfortunately, once all the gyrations are over, sales and costs will determine the long term viability and cash position of the company. You can manipulate working capital for a while to improve your cash position, but those positions can easily unwind or go the other way. And tax rebates are sometimes only one-time in nature. Based on the outlook management provided last quarter, BBRY will lose money this quarter. They are building inventories and sales are looking shaky - this implies that working capital will likely be a use of cash, rather than a source of cash. If they are spending anything on marketing, that will also suck up some cash. Unfortunately, I suspect that the company's cash position is going to take a severe hit this quarter.

SEPTEMBER 4, 2013 5:29 P.M.

Anonymous wrote:

if Lenovo buys BBRY, what happens with all governmental contracts?

SEPTEMBER 4, 2013 5:46 P.M.

This game is over wrote:

BB10 is a tech dead end. The usual three guys can keep spamming comments sections shouting to the heavens how wonderful BlackBerry is but the truth is Blackberry lacks the software expertise to even update the Playbook, let alone sustain the basis for an ecosystem. And developers know that so the good ones avoid Blacberry as a vipers nest filled with cheap app spammers. Tens of thousands of spambot programs by one company alone and Blackberry just shrugs their shoulders, just happy anyone makes their numbers look better.

And now Blackberry announces they'll have a deal wrapped up by November without bothering to mention an actual buyer? Don't be surprised when you later find out some big bag holders sold off their stock today.

SEPTEMBER 4, 2013 7:35 P.M.

Anonymous wrote:

November means before the Q3 earnings report. Odds are. Q4 will be so abysmal that who knows...

The current board has only two guys with any technical background. More than half the current board only go back to 2012.

A quick auction? Do we have any precedence for that? Definitely an opportunity for someone to buy on the cheap and later strip it down some more. At this point. Having announced this. Do they really expect renewed interest and subs? Shouldn't government and enterprise at this moment be saying to themselves WTF?!

SEPTEMBER 4, 2013 7:45 P.M.

Anonymous wrote:

I checked Google Trends for whatever nomenclature wise that's Blackberry and the chart goes almost straight up on web search activity and then very quickly over the scan of a couple of months the chart line drops by 60%. I would have expected quite the opposite re BB10 as in monthly and quarterly growth would have lept up and up exponentially.

SEPTEMBER 4, 2013 8:12 P.M.

Dear fellow Barron's wrote:

Maybe before November, the WSJ could send a video crew to see Blackberry in Waterloo. Call the show: How Mych Do You Think This Costs! Arf arf arf:-P

If anything doesn't sell. Will it be listed on eBay?

SEPTEMBER 4, 2013 8:19 P.M.

Fate Wise... wrote:

If this story happened 2000 years ago; the previous CEOs would be crucified. And Blackberry users would be thrown into the Roman Coleseum to face the lions. Blackberry users in the Coloseum would be texting each other stuff like: Hey dude. There's a lion behind you. RUN!

SEPTEMBER 4, 2013 9:20 P.M.

OECD Results are in. wrote:

Canada. A G8 country but more likely according to GDP an eleventh place holder rather than being among the eight. Gosh According to today's OECD Metrics Canada is in 14th spot re Competitiveness. 14.

1. Switzerland. 5. USA, up two spots. Canada. 14.

SEPTEMBER 5, 2013 12:38 P.M.

markmall wrote:

How are loyal keyboard users supposed to upgrade to the new Q10 when their OS7 servers are incompatible? Do they demand that their company upgrade so they can buy one phone?

This and other marketing failures doomed this company. It's too bad because their phones offer a great solution for many business and other serious users.

SEPTEMBER 5, 2013 12:44 P.M.

markmall wrote:

It does seem like Barrons has a short interest and is really upset and skeptical of the up side movement.

SEPTEMBER 6, 2013 4:56 P.M.

Honestly wrote:

Who is the big market watcher / manipulator when it comes to Blackbery-RIM, historically speaking? And is it more than one like some kind of a conspiracy? Seriously.

The stock's upswing here is purely baloney. That's become a Canadian thing that's more repulsive than round bacon. Yeah. Baloney. Seems every time Apple comes out with big news and there's much to anticipate that RIM/Blackberry nuzzles in on the action. That goes back to the Balsillie Lazaridis days. Is this the fundamental reason why Stymiest is on Blackberry's board? She the milk maiden?

Make no mistake. This company is screwed. Screwed to the ground. And so will most investors be. Question remains. Who's going to be the big beneficiary? Someone is going to walk away pretty fortunate and it ain't out of luck or skill. Why's the media not watching for this and the baloney tournament?

The media helped build up this company and the stupid egos of it's original crew. They might as well watch it as what's left of it is bought, chopped, diced and used as buzzard food.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.